United Kingdom

UK focus: Industry warning over UK price plan

Wind - both onshore and offshore - is to play the lead role in delivering the UK's 2020 clean energy targets as electricity from renewables is set to rise more than fivefold from today's levels, says the UK government in its renewable energy strategy.

But among a raft of welcome measures is a power pricing proposal that the wind industry fears could undermine the very market that the UK is banking on to meet its ambitious goals.

The strategy by the Department of Energy and Climate Change (Decc) sets out a route map for meeting 15% of UK energy from renewables by 2020. This is the country's share of the overall EU 20% renewable energy goal, split between the three major sectors - electricity, heat and transport. With the UK starting from a low level of 2.25% of energy from renewables in 2008, the target demands the largest percentage point increase of any EU member state.

Electricity is the sector that will be required to do most, contributing nearly half of all renewable energy. Although Decc stresses that values for sectors or technologies in its renewable energy strategy should not be considered targets, its "lead scenario" suggests that more than 30% of electricity will come from renewables in 2020 - up from around 5.5% today, with renewables contributing 12% in the heat sector and 10% of transport (see chart above). And, given that the UK boasts the largest wind resource in Europe, it comes as no surprise that it is relying on wind to supply more than 66% of all renewable electricity (see chart, left).

Moreover, wind is the technology that has shown the fastest growth in recent years. Since introduction of the renewables obligation support system in 2002, onshore wind production has grown from 1.3 TWh to 5.8 TWh in 2008, with an installed capacity of more than 3800 MW today. The UK has also overtaken Denmark to become the leading global player in offshore wind, with around 600 MW currently operating, which generated 1.3 TWh in 2008.

The renewables obligation requires electricity retailers to source a rising proportion of their electricity from renewable sources by buying renewables obligation certificates (Rocs), or pay a buy-out penalty for any shortfall. The level of the obligation is set at the beginning of the year at 8% above the level of Rocs expected to be issued that year. In addition to support under the obligation, renewable generators also receive revenue from the sale of their electricity at the wholesale market. But Decc accepts that further financial incentives are needed to make the leap to over 26 GW of total installed wind capacity - supplying more than 20% of total electricity by 2020.

It proposes increasing the term of the obligation from its current cut-off date of 2027 to 2037 while at the same time limiting the period of support for each project to 20 years. To reduce the risk of renewables deployment exceeding the level of the obligation - and causing Roc prices to fall - Decc also plans to increase the headroom in the obligation. Headroom, introduced in April, moves the obligation on energy retailers away from a trajectory fixed years ahead towards more flexible annual targets set before the beginning of each year at 8% above the number of Rocs expected to be issued that year. With actual renewables deployment over recent years falling far short of the size of the obligation, electricity customers have found themselves paying for non-existent renewable capacity as energy retailers pass on the cost of failing to meet their obligations. As the pace of renewables deployment increases, the 8% headroom also prevents the obligation from actually suppressing development as Roc prices fall sharply when actual capacity exceeds the size of the obligation. An extension of headroom to 10% comes into effect in 2014/15, further reducing the risk of that cliff edge being reached. The extension has been welcomed by the renewables industry.

But causing acute consternation among wind and other renewables developers is Decc's plan to stabilise wholesale electricity prices to renewable projects - a measure it argues would slash excess profits to generators at times of high market prices while also reducing the cost to consumers of supporting renewables and, at times of very low wholesale prices, reduce the risk to developers. A more predictable level of revenue could deliver between 2.5 and 6.4 GW more renewable generation, it claims.

Added complexity

But the proposal is universally unpopular among the industry, says Gaynor Hartnell, director of policy at the Renewable Energy Association (REA). It adds yet another layer of complexity to an already complex mechanism, she maintains. "Decc wants to solve the problem where electricity customers end up paying for the renewables target regardless of the level of (renewables deployment) but it gets there by such a convoluted route it might just put investors off."

Gordon MacDougal, chief operating officer of wind developer Renewable Energy Systems UK and Ireland, is also concerned at Decc's proposed manipulation of power pricing. "This is adding a significant additional layer of government interference into the electricity market," he says. "It is a feed-in tariff by any other name," he adds, referring to the fixed-price support system used in Germany and a number of other European countries.

MacDougal approves of most of the proposals in the renewable energy strategy: "A lot of good thinking has gone into the strategy, but (the power pricing measure) is the one thing they have fundamentally got wrong." But he also sounds caution on Decc's proposal to allow overseas projects access to support through the renewables obligation to make up any shortfall if the UK looks set to fail to meet its targets domestically. "That needs to be carefully considered," he says. He adds that the government should be focusing on the UK market and ensure that it can meet its commitments within its borders.

A consultation by Decc on its proposed financial incentives closes this month.

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